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U.K. Awaits EU Short-Selling Ruling Ahead of Banker-Pay Fight

January 20, 2014

The European Union’s authority to ban short selling will be put to the test by the EU’s top judges, as part of British legal challenges to EU measures ranging from transaction taxes to bonus curbs.

The EU Court of Justice, the 28-nation bloc’s top court, will rule tomorrow on whether the European Securities and Markets Authority’s emergency powers impede on national regulators. The outcome of the case may have an impact on how the EU must adopt other banking proposals.

The U.K. has repeatedly found itself on the defensive in EU financial-regulation negotiations. The nation last year opposed a deal to cap banker bonuses at twice annual salary and filed a similar challenge at the Court of Justice on the issue.

Prime Minister David Cameron has promised to seek a new settlement with the EU, amid rising opposition that has seen the U.K. Independence Party, which advocates a divorce from the bloc, gain in opinion polls. Cameron’s promise to hold a referendum on EU membership by the end of 2017 has failed to quell calls from members of his Conservative Party for Britain’s European destiny to be put to the people sooner.

Britain’s tendency to turn to courts to settle regulation fights may cost the nation influence in the EU, Sven Giegold, a German lawmaker in the European Parliament’s Green group, said in a telephone interview.

Sports Metaphor

“It’s like in sports, if you always go after the match to challenge decisions, then this doesn’t make you friends,” he said. “You should raise this during the adoption process, and not wait until the very end, perhaps not even having clearly opposed the draft law.”

The U.K. Treasury, which filed the lawsuit, declined to comment.

Britain’s drive to have the short-selling powers annulled received some backing in a non-binding opinion provided by one of the court’s senior advisers last year.

Britain contests EU rules allowing Paris-based ESMA to introduce short-selling bans to protect the “integrity of financial markets.” Under the law, ESMA can only act if a crisis has “cross-border implications” and national regulators have failed to deal with it.

Lehman Brothers

ESMA is one of three EU-level agencies set up to coordinate oversight of securities markets, banks and insurers in the wake of the collapse of Lehman Brothers Holdings Inc.

Short sellers seek to profit on declining markets by selling borrowed shares or bonds, on the belief their price will fall, then replacing them with securities bought at a lower price.

Niilo Jaeaeskinen, one of the EU court’s advocates general, gave partial support to the U.K. in his opinion last year, saying that the voting methods used to adopt the short-selling regulation were flawed.

Should the court uphold the adviser, it “would be a very significant development” with implications for other pieces of banking and market legislation, Alexandria Carr, a regulatory lawyer at Mayer Brown LLP in London, said in an e-mail.

The decision to give the powers to ESMA should have required a unanimous vote among nations to ensure “enhanced democratic input,” Jaeaeskinen said. Still, Jaeaeskinen rejected other arguments Britain made to overturn the law.

A shift to unanimous decisions would entail linking the powers to a different article in the EU’s treaties, opening up the possibility that some EU nations, including the U.K., might have to get approval from national voters to re-adopt the short-selling law, Carr said.


Other EU measures that could be affected by this week’s ruling include plans by the bloc to build a centralized system, known as a Single Resolution Mechanism, to handle failing euro-area banks, Carr said.

The blueprint for the SRM is being fiercely contested by lawmakers and national governments, with part of the quarrel centering on interpretations of what is possible under different articles of the bloc’s treaties. Germany has led a push to enshrine part of the SRM blueprint in an international agreement outside the scope of EU law.

Draft legislation to overhaul the EU’s financial-market rules, known as Mifid -- which was politically agreed on by lawmakers last week -- may also be affected, Carr said.

Upholding last year’s non-binding opinion, could prove a “Pyrrhic victory” for the U.K., Giegold said. While the advocate general questioned the voting procedures to adopt the short-selling law, he upheld the broader point that it is legally possible for ESMA to wield these powers.

Further Reach

“That might well open the possibility for a much further reach in European decision-making,” he said. If the court follows this line, “it could be very helpful for future financial-regulation legislation.”

Chantal Hughes, a spokeswoman for Financial Services Commissioner Michel Barnier, the architect of the proposal to give ESMA the short-selling powers, declined to comment.

Other pending cases at the court concern a financial-transaction tax being discussed by some EU nations and a challenge to European Central Bank policies that the U.K. says could push clearing of some derivatives away from London and into the euro area.

The case is: C-270/12, United Kingdom of Great Britain and Northern Ireland v. Council of the European Union, European Parliament.

To contact the reporters on this story: Jim Brunsden in Brussels at; Stephanie Bodoni in Luxembourg at

To contact the editor responsible for this story: Anthony Aarons at

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